Title of your idea
Key Interest Rates- Enabling hedging of risk and speculation on rate changes.
Summary Description
The US Fed Fund Interest Rate, Prime Rate, and LIBOR interest rates are some of the most important interest rates in the world and influence other interest rates, including consumer rates such as credit cards, mortgages, and bank loans. It also affects the value of the U.S. dollar and other household and business assets.
The federal reserve uses the Fed Funds rate and other rates to manage the economy. These rates can be used to manage inflation, promote maximum employment, and keep interest rates moderate. These actions will maintain healthy economic growth.
The fed funds rate indirectly influences even longer-term interest rates. Investors want a higher rate for a longer-term treasury note. The yields on Treasury notes drive long-term conventional mortgage interest rates.
Because of the dependencies that trickle down through the system, it can take months for a change in the rate to affect the entire economy. To plan that far ahead, the Fed has become the nation’s expert in forecasting the economy.
All this means many investors watch the monthly FED meetings like hawks. Analysts pay close attention in order to try and decode what the Fed will do. They know a 0.25 percentage point decline in the fed funds rate can send the markets higher in jubilation. Meanwhile, a 0.25 percentage point increase, intended to curb inflation can prompt a decline in the markets because of concerns about slowing growth.
While there are many synthetic assets to track specific index funds or equities, the ability to hedge interest rate risk or speculate by using tools against a synthetic asset that tracks those rates would open new opportunities with an large established appetite for use.
Which metric will your synth track?
Federal Funds Interest Rate
Prime Rate
Would Also like to look at LIBOR, but with that likely being phased out by the end of 2021, I would suggest revisiting in the future.
How will you get data for your metric
The data is widely used and there are many free sources to use.
Given the widespread applications in traditional finance, it is very accessible, reliable, and not expensive.
Here are a couple examples of source data:
https://fred.stlouisfed.org/series/DPRIME
https://www.xignite.com/Product/global-interest-rates#/productoverview
https://fiscaldata.treasury.gov/api-documentation/
What collateral would you use for this synthetic
USDC due to stability and deep liquidity.
Describe how you would create this synthetic
I don’t have the technical aptitude to describe the intricacies of what it would take to create these tokens, but should be possible based on the data and APIs available.
I think an additional thing to consider is leveraged positions based on this. When we look at historical examples of interest rate risk, we have seen extreme examples in the 1980s with inflation. The ability to open leveraged positions would increase the flexibility of risk mitigation or speculation for these assets and the metrics they track
https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp